Tag Archives: 2012 economy

Recovery is on the horizon, but industry experts are cautious in their forecast as the 2012 economy slowly bounces back.

Looking at Arizona’s recession-starved commercial real estate industry as a whole, 2011 was flat and 2012 is trending just slightly better. So say local experts.

But broken down into its various components, there is a wide divergence of attitude and optimism for the rest of this year.

AZRE tapped key players from a variety of real estate-related disciplines to check their crystal balls and predict whether commercial real estate will soar, slump or stagnate in 2012, and what factors could turn the tide.

InvestmentA plethora of CMBS properties will come due in 2012, and private owners of distressed properties may be more willing to sell, says Jennifer Pescatore, who oversees commercial real estate loans for Bank of Arizona.

There is plenty of money available for the right property in the right submarket and investors with the right credentials, she says.

But except for the multi-family sector and some industrial opportunities, Pescatore isn’t sure values have slipped enough to generate a significant number of sales or new development in 2012.

“Arizona offers a unique opportunity, and it’s a great place to do business,” Suchala says.

This year could be better than expected, Suchala notes, but for measurable improvement in real estate values and transactions, 2013 is a more realistic time frame.

Economic development
Economic development directors by nature are always upbeat about the future, and Chandler’s Christine Mackay has reason to be.

“Activity level since the first of the year has gone through the roof,” she says.

Intel is constructing a new fabrication plant scheduled for completion in 2013 but already keeping a virtual army of construction workers busy. And when Intel ramps up, so do the tech giant’s customers and clients, Mackay adds.

Other healthy growth signals: EBay/PayPal is expanding, building out the fourth floor of its Chandler facility.

In January, San Diego-based developer Doug Allred Company broke ground at the NEC of Price and Willis roads in Chandler for Park Place, the Valley’s first spec office complex to rise from the dust of the recession since 2009.

Phoenix has a lot more old office properties to fill up before any spec projects are likely to appear on its planning agenda, but virtually all the big warehousing/distribution center space has been snapped up, and the city is actively looking for “shovel ready” spots where developers can build more, says Bruce MacTurk, deputy director for economic development.

It’s a good news-bad news scenario, he says.

By mid-January, five large industrial users were looking at Phoenix, but the city had only two buildings with more than 500,000 SF of space available.

There’s even some good news about Phoenix’s languishing retail centers as owners are renovating to reposition the sites, MacTurk says.

While economic development leaders like MacTurk and Mackay are focused on job creation, the fallout from job growth is a healthier, more vibrant residential and commercial real estate scenario, they say.

Construction
“Compared to this time last year, it feels much better,” says Bo Calbert, McCarthy Building Cos. Southwest president. “There are a lot more opportunities to pursue.”

McCarthy’s revenue is up 10%, he says. Key drivers for that spike are healthcare, renewable energy, schools and Native American projects, especially in hospitality and gaming.

But Calbert says he believes there is “more pain to come” before Arizona’s construction industry is back on a solid uphill track.

“To be an Arizona-only contractor is not sustainable,” he says. “There is promise, and more opportunities are coming, but not enough.”

D.P. Electric vice president Scott Muller says he has a backlog of healthcare and military projects to keep workers busy in 2012 — primarily technology upgrades.

And the company is detecting more interest from local property owners and developers, some hoping to entice California data centers and manufacturing operations ready to make a move.

“We’re excited about 2012,” Muller says.

“Those in the real estate and construction industry understand that the current market, compared to three or four years ago, has created a great opportunity to build, move or expand at a significant cost savings,” he says. “In 2012, we’ve seen an increase in our Design-Build/Design-Assist projects because this is where the best value is brought to the owner/developer.”

“Technology is constantly pushing the limits of existing buildings,” says Medici, managing director of SmithGroupJJR Arizona Architects. “And a lot of hospitals are positioning for the future or catching up from the past.”

Architects are tapped for new projects at the conceptualizing stage, and Medici sees good news coming for all commercial real estate sectors, even if the bounty won’t happen in 2012.

“We are seeing several developers looking at mixed-use office/retail/multi-family, especially along the light rail line,” he says. “It’s not as much activity as in 2004, 2005 and 2006, but there are opportunities bubbling up. For two years previously developers were not talking to us. Now modestly they are coming out of the woodwork.”

LEO A DALY architectural firm just completed the Casino Del Sol Resort in Tucson and is currently working on a project with Davis-Monthan Air Force base, says senior architect Rod Armstrong.

There is no pent-up demand for shopping centers or new office buildings, Armstrong says, but the international architecture firm is “always in business development mode,” and the signs are positive.

“We feel the increased level of commitment with potential clients. People are loosening up, and things will happen quickly. We’re hopeful for 2012,” he says.

Multi-family
While interest in and financing for new development remains limited in Metro Phoenix, one sector finding favor is multi-family, fueled by a limited supply and the single-family housing market collapse, says Tom Simplot, Arizona Multihousing Association president.

“Apartment owners are cautiously optimistic due to a rebound in values and rents,” Simplot says.

He doesn’t envision a lot more product coming online in 2012, but in select markets — in Scottsdale, Ahwatukee, and along the light rail line — some projects are moving forward and could be under construction this year and available by 2013.

Luxury condo developer Optima is betting Scottsdale is ready for more downtown-living opportunities.

“Optima Sonoran Village is in an advantageous position because it is the first new residential development in several years and builds on the economic, architecture, and marketing success of Optima Camelview Village,” says David Hovey Jr., Optima vice president. “Construction has started on Optima Sonoran Village with occupancy second quarter of 2013.”

Hovey says financing is still tight and mixed-use projects are iffy because of existing over-supply of office and retail components, but, if there is “only a gradual increase in new product over the next few years, the luxury unit market will remain healthy.”

Healthcare
Medical facilities needing upgrades or expansions to keep up with changing technologies, aging baby boomer needs and unsettled health coverage issues, are providing work for local real estate trades — a trend that will continue throughout 2012.

Cancer- and pediatric-focused projects are already in progress, as are several clinics and rehabilitation centers aimed at bringing cost-effective healthcare into communities, says Sundt Construction’s Russ Korcuska, who has been piloting hospital construction projects in Arizona for two decades.

Still, some of the big players will “sit on the sidelines until the (November) election because of the tremendous effect that could have on healthcare and Medicare. The new congress will be pivotal,” Korcuska says.

Some upgrades can’t wait.

“Healthcare construction is tied to population, and there is a great need to accommodate the baby boomer generation,” says Steve Whitworth, Kitchell’s Healthcare Division manager.

Healthcare construction will see a “slight increase in 2012, as larger organizations prepare for healthcare reform,” he says.

Whitworth predicts a sharper focus on cost-cutting delivery methods and energy efficiency in 2012 both in new development and upgrades to existing facilities.

“Healthcare will remain healthy,” he says.

Solar
Solar power was Arizona’s red-hot growth topic a year ago, with government leaders proffering incentives and touting the state’s virtues to the clean-energy companies looking for a place to grow and prosper.

Then mid-year, solar panel makers Solyndra and Stirling Energy Systems failed, and in December industry giant First Solar said it would slow progress of its under-construction Mesa plant.

So how do some of the state’s solar experts envision their industry’s 2012 prospects?

SRP sees strong demand for solar upgrades in both commercial and residential uses even though it “slowed somewhat” from 2011 when monetary inducements were greater, says Debbie Kimberly, director of customer programs and marketing.

“It’s encouraging to see this demand even at reduced incentive levels,” Kimberly says.

She says she expects interest in solar to continue apace throughout 2012, especially in leased rather than purchased systems.

And APS’ 2012 outlook for solar is “overwhelmingly positive” based on continued strong customer demand, says Barbara Lockwood, the utility company’s director of energy innovation.

“We asked our customers,” she notes. “The customers want solar.”

Installers could second that.

“Our forecast is 100 percent growth over last year,” says Gary Held, Harmon Solar sales and marketing manager. “And last year was the biggest year we ever had on the commercial side.”

But that’s from the perspective of the companies that purchase and distribute solar energy.

The growing global glut in solar manufacturers is squeezing the industry from that perspective, she says, as evident by First Solar’s slowdown and some companies folding.

Lockwood predicts prices will stabilize in 2012, and solar supply and demand will reach equilibrium.

Brokerage
Nobody has a handle on the intricacies of the local commercial real estate industry like the brokers who buy, sell, market and lease properties. Their outlook for 2012 is guardedly upbeat, depending on the type of property and its location.

And overall there was 5.9 MSF of “gross activity,” as plummeting rents prompted tenants to move to classier digs.

Most of the Valley’s Class A offices filled up in 2011, and Class B and C space could see an occupancy boost in 2012, whittling away at the surplus supply, says Chris Jantz, Cassidy Turley/BRE Commercial vice president of research.

But neither Henig or Jantz envision a big drop in overall office vacancy this year.

Empty industrial space was gobbled up in 2011, and that could spur development, Jantz says, but new properties likely won’t come online until 2013.

Retail real estate has been the big laggard throughout the recession, and while Henig doesn’t expect much overall absorption in 2012, he foresees “musical chairs” as retailers reexamine their footprints based on recent consumer trends. For example, the surge in online sales may result in smaller, or at least different, brick-and-mortar space usage and bigger warehousing needs.

Henig also predicts that Phoenix area retailers will take advantage of still-sinking rents to move into better locations in 2012.

Tucson’s prospects are rosy.

“All signals are pointing up for Tucson in 2012,” says CBRE Tucson managing director Tim Prouty. “Our vacancies have improved. We see a positive absorption in industrial certainly, office probably, and some improvement in retail as well.”

A recent University of Arizona study predicting 2.35% average job growth in Tucson for the next five years — a boost of more than 52,000 jobs overall — is nurturing Prouty’s confidence.

And Tucson’s successful wooing of biotech businesses, such as Roche Group’s planned major expansion, “will be a big story in 2012,” Prouty says.

Land
After bottoming in 2009, land sales nationally picked up modestly in 2012 and remained level in 2011, according to Grubb & Ellis.

Through 3Q 2011, land sales were just about even with the same period in 2012 at $13.6B, but the sales mix was different. Through 3Q 2011, industrial land sales were up 133% as the industrial leasing and user-sale market improved to the point where developers began ramping up for the next expansion cycle.

In 2012, according to Grubb & Ellis, expect a modest increase inland sales led by development sites for multi-family projects and distribution centers, which are further along the recovery cycle.

Key concernsWhile all the players envision a slight, if spotty, up tick in Arizona’s commercial real estate market, they say job growth and the global economy are key concerns determining 2012’s prospects.

A couple of local legislative issues also factor into the mix, says Nick Wood of Snell & Wilmer.

Tax assessments paid in arrears for commercial structures built in the mid-2000s that experienced severely plunging values in recent years could hamper sales and renovations of languishing real estate, Wood says.

“If you look at values for 2007, some offices have lost 60% to 70% of their value, and there hasn’t been a corresponding reduction in taxes,” Wood says.

And recent revisions to government property lease excise tax (GPLET) rates for new commercial structures can act as a deterrent to economic development, especially in downtown areas, he says.